Takeaway:Pending Home Sales grew 80 bps on a month-over-month basis, which brings the year-over-year growth rate to +4.1% vs. +2.1% last month.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

Today's Focus: November Pending Home Sales Index

The National Association of Realtors (NAR) today released its Pending Home Sales Index for the month of November.

Pending Home Sales increased +0.8% MoM (vs. -1.2% prior), accelerating to +4.1% on a year-over-year basis. Home Sales increased across all regions with YoY growth accelerating across each as well. Compares continue to ease from here.

EHS Acceleration?PHS is a leading indicator for EHS with an R-square of 0.86+ between the two series (lagged 1-month) over the history of the data. Thus, the EHS release is typically uneventful as both the direction and magnitude of change in existing sales is well-telegraphed by the Pending Home Sales report a month earlier.

However, we’ve seen rising volatility/divergence between EHS & PHS on a month-to-month basis since the series troughed in March. Summarily, and as the 1st chart below illustrates, EHS began to diverge from the more modest gains in PHS in September and October. We posited that unless PHS saw a significant positive revision or showed material acceleration, reported gains in EHS would likely retreat.

We saw this materialize in November with reported EHS dropping -6.1% sequentially, falling below the gain in PHS and taking the cumulative gain from trough to +7.4%. Now the setup has essentially reversed with the balance of risk for EHS to the upside with cumulative growth in PHS at a premium to EHS and showing incremental strength in November.

RoC Improvement..Early Evidence: A core (albeit simple) underpinning to our positive view on housing for 2015 is the progressively easier demand comps as we traverse the peak negative impact of rates/weather/credit tightening into 2H15. We are seeing early evidence of 2nd derivative improvement with Pending Home Sales rising +4.1% YoY in November, marking a 3rd straight month of positive growth (following 11-months of neg. growth) and accelerating 200bps vs. the +2.1% growth reported last month. In the intermediate term, demand compares continue to ease into February with Dec-Feb comps of -8%, -9%, -10%, respectively.

About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

Joshua Steiner, CFA

Christian B. Drake

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Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

In this complimentary New Year’s Eve podcast of Hedgeye’s Morning Macro Call, CEO Keith McCullough discusses the most important macro data on his screen and answers key questions from institutional subscribers.

Keith highlights the desperate scene in Europe as Mario Draghi and Peter Praet (chief economist for ECB) effectively beg for quantitative easing. He also discusses the effects of Quad4 #deflation and why gold will not go up until the USD retreats.

Keith's Macro Notebook 12/31: China | Oil | VIX

THE HEDGEYE MACRO PLAYBOOK

Takeaway:In today's edition of the Macro Playbook, we discuss what we think are rising prospects of another bubble in Chinese equities.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

Health Care Select Sector SPDR Fund (XLV)

Consumer Staples Select Sector SPDR Fund (XLP)

iShares National AMT-Free Muni Bond ETF (MUB)

iShares 20+ Year Treasury Bond ETF (TLT)

Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

SPDR S&P Regional Banking ETF (KRE)

iShares Russell 2000 ETF (IWM)

iShares MSCI European Monetary Union ETF (EZU)

SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

iShares MSCI France ETF (EWQ)

QUANT SIGNALS & RESEARCH CONTEXT

China Equity Bubble 2.0?: In 2014’s “Year of the Horse” China’s benchmark A-Shares index, the Shanghai Composite, galloped all the way to a +52.9% return, handing mainland Chinese and QFII investors their best annual return from stocks since a +79.9% return in 2009.

Prior to this year’s melt-up – the bulk of which had been condensed in the final 6M of the year (the Shanghai Composite was actually down on the year through 7/24) – A-Shares had delivered a negative annual return in three of the previous four years:

2010: -14.3%

2011: -21.7%

2012: +3.2%

2013: -6.8%

Source: Bloomberg L.P.

This pattern is eerily similar to the five years preceding the 2006-07 bubble in the A-Shares:

2001: -21.6%

2002: -17.5%

2003: +10.3%

2004: -15.4%

2005: -8.3%

2006: +130.4%

2007: +96.7%

Source: Bloomberg L.P.

That obviously begs the question: is this the start of another bubble in mainland Chinese equities? Ultra-bullish volume and turnover signals support an outlook for continued upside, which rhymes with the pattern seen in 2006-07 (though there has been significantly more of both during this current melt-up):

Source: Bloomberg L.P.

To be crystal clear, we think the rally in the A-Shares has legs, though we continue to search for confirming evidence as it relates to forming a communicable thesis. We’re still in the early innings of this process (i.e. we’re not yet comfortable with officially going LONG of the CAF ETF), but we think the story is likely to end up as follows:

As this perpetual state of #Quad4 threatens the employment and wage growth outlook in China, the State Council and PBoC commit to a stated +7% floor in real GDP growth by easing monetary and fiscal policy, at the margins – already happening

Stay tuned as we look substantiate the aforementioned hypothesis with further analysis in the coming days and weeks. 2015’s “Year of the Sheep” could be a magical year for Chinese equities – the A-Shares in particular. It’s also worth noting that the sheep is generally considered to be a lucky animal among the Chinese, as it is the 8th animal in the 12-animial zodiac and the number 8 is generally perceived to be among the luckiest of all numbers in China…

Happy New Year and best of luck to you and your team in 2015! Many thanks for your continued patronage and interest in our research.

#Quad4(introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.

#Bubbles(introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.

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